1. EU Emissions Trading System (EU ETS): Rationale, outcomes and ethics
ETS: What is it?
ETS: Why should it work?
ETS: Is it working?
ETS: Is it ethical?
Reforming the ETS

2. 1. EU ETS: What is it?
Vehicle for realising EU’s Kyoto commitments (-8% CO2 on 1990 levels by end 2012)
Phases: I ( ); II ( ); III (2013-)
Users: EU, EU members (NAPs), and designated installations
Midstream variant of permit trading:
11,500 installations representing 50% of EU CO2 emissions
Energy intense EU installations (eg 20MW+ output) eg oil refineries; iron, steel and cement plants; glass and paper factories; UK universities
24 countries: EU 27 minus Bulgaria, Malta, Romania
Aviation (11% of EU’s total emissions), agriculture (10%) and Household/SMEs (17%) exempt
Allocation: currently free-of-charge and based on historical emissions (‘Grandfathering’)
Internal banking, borrowing and trading of EUAs; external purchase of permits via CDM / JI
Fines for non-compliance of €40 (Phase I) and €100 (Phase II)

3. EU ETS: Why should it work?
Least cost mitigation through incentives
Alternative to (i) command-and-control and (ii) carbon taxes
Solves capability / responsibility conundrum
Reduced enforcement costs
Avoids unpopularity of taxes, targets and other direct regulation
Cheapest reductions first (price effects)
Reduced compliance costs
Positive experience from use in other environmental commons problems: (i) CFCs; (ii) acid rain (iii) fishing
Part of a multi-strand approach (eg exempted sectors)
Estimated reduction in mitigation costs per annum (in 2004 €) from €6.8billion → €2.9billion

4. EU ETS: Is it working?
Size of market: €28 billion traded in 2007 (1.6 billion tonnes of CO2 = 70% of global carbon market) market ≈ €38
Initial outcomes
Resulted in circa 20m tonne CO2 reduction on BaU baseline since 2007
But EU 25 emissions up 1.9% (UK + 5.8%)
Kyoto 39 emissions up 2.3%
Efficacy depends on permit shortfall but NAPs in Phases I + II distort market by allocating excess permits thereby (i) creating multibillion € windfalls for energy companies and (ii) suppressing EUA price.
Volatility: the price of EUAs has moved wildly (and mostly downwards): €30 → €16 since July 2008 (see graph) which…
Discourages investment in new energy technologies (CCD)
Makes it harder for business to plan or implement energy strategy
Key sectors excluded (aviation; other transport; agriculture) and complementary regulation has failed
Demand destruction post-banking crisis (Mittal eg) has depressed EUA prices and thereby pollution cost

5. EU ETS: Is it ethical? Distributive equity:
Overall costs; Net donors; Net recipients
Fit with adaptation measures
Procedural justice
Corrosion of environmental responsibility
5. Inappropriate commodification
Unanticipated outcomes
Environmental ethos; of other values

6. Reforming the EU ETS: Fully Upstream or Downstream
Extend the scheme to all relevant polluters
Auctions not free allocation: recycle revebues to renewables and adaptation
Naming and shaming
Hoarding and purchase limits

7. Historical Volatility of EUA price

8. Recent Volatility of EUA price